Wednesday, 30 September 2009

Is the economic freedom index flawed?

Dr Guy Scott (Patriotic Front Vice President) is not too impressed with ZIPPA's Economic Freedom of the World 2009 index. I have not seen the ZIPPA index, but I suspect it draws on the latest CATO Institute Index for Economic Freedom. That puts Zambia's economic freedom in 2007 ahead of other African nations. The only problem is that Heritage Foundation's 2009 Economic Freedom Index does not rank Zambia top in Africa. I'll leave to others to reconcile the two indexes. Interestingly, Dr Scott forgot to hit on the main problem with all indexes : Zambia should score highly because the index places great weight on lower tax rates. For similar reasons, Zambia appears to be making progress on the Ease of Doing Business Index - see here:

“Zambia ranked top in Africa! In the Economic Freedom of the World 2009 Annual Report, just released by the Zambia Institute for Public Policy Analysis (ZIPPA), Zambia is ranked 49 out of 141 countries. And it now has the highest ranking in Africa, one above Botswana, with Kenya at 54 and South Africa at 57. “This”, said Professor Muyunda Mwanalushi, ZIPPA’s Chairman, “is most encouraging…...”

I received this item as a special email bulletin from ZIPPA last week. ZIPPA is a Zambian ‘think tank’ that operates mainly on the internet (and from the Copperbelt) and which has a somewhat neoliberal coloration, different of course from Yours Truly, the one-man Keynesian think tank in the Business Post. It is the local associate of an international network called “Free the World” which campaigns vigorously for smaller government, lower taxes, greater freedom in doing business, freer markets, and so forth.

Now it is very rare, perhaps unheard of, for Zambia to be top of anything (even a bad thing) in Africa, so I naturally took an interest in Mwanalushi’s claim in the opening paragraph. First, is economic freedom, assuming this is a well-defined quality, an unalloyed benefit to a country? The professor helpfully appended to his email a short article by one Eustace Davie of the “Free Market Foundation” that ends with the unqualified claim:

“Countries that have greater economic freedom have higher economic growth and higher per capita incomes than less free countries. People in freer countries are healthier, live longer, are more productive, have more political rights and civil liberties, and the incomes of the poorest 10 per cent are far higher than those in less free countries. The key ingredients of economic freedom are personal choice, voluntary exchange co-ordinated by markets, freedom to enter and compete in markets, and protection of persons and their property from aggression by others.”

So it may seem that economic freedom is a great boon to those who have it (in greater amounts than Kenya and South Africa – wow!). However, we must remind ourselves that the world economic nightmare of the last year (and perhaps the next year or two) was caused by excessive economic freedom – excessive application of the free market and “greed is good” principles in the absence of regulation. It is one thing to have supermarkets full of affordable goods, it is another to be placing peoples’ savings into gonga assets such as sub-prime mortgage backed derivatives. When a market deals in non-perishables and starts to regard its own past performance as a metric for present and future performance, then it can spiral upwards in a self-inflating “boom” (think stocks and shares, think housing bubbles). Booms invariably turn to busts, despite the fact that there is always a bogus theory to explain why “this boom” will not. Far from being collectively wise, one might reasonably conclude that the IQ of the market is equal to that of the dullest player

All this is familiar to addicts of this column (yes, you exist, I keep meeting you) and perhaps we can lay off the subject of the malfunctioning of financial market capitalism for now and come home to Zambia – where we will interview some people and ask their opinion about economic freedom and its benefits.

“Good morning Mr/Ms. Lusaka Street Vendor - or should I say former street vendor? You have just been forcibly removed from your patch on Lumumba Road by a heavily armed policeman force-fed on allowances provided, under protest, by the Lusaka City Council. How do you feel about the level of economic freedom in your sector?”

“Freedom? <> ”

One problem with understanding the street vending problem is that employed or otherwise wealthy Zambians have adopted an attitude towards vendors that was once the monopoly of white madams and bwanas. Once upon a time it was a matter of race, with the whites demanding the “disappearance” (in the nicest possible non-South American way of course) of the scruffy blacks from the streets of the Central Business District. Now it is a matter of class, with made-it blacks becoming madams and bwanas themselves – perpetuating attitudes towards the poor and unsightly that are 100 per cent derived from the colonial era. When the police have done the job, such posh people rejoice “No more vendors!” without wondering, for a second, where they have gone. They have conveniently “disappeared”. How do you expect such superior people to stick their noses close to the problem and actually try and understand it?

Well, where have all the vendors gone, short time passing? Have they gone, as per some theories, into the legal markets? Last week I described how, at the height of the One Party State, markets in Lusaka were controlled by UNIP committees. Admission, stall rentals, retail prices and other things were controlled by these committees. The principle was “collectivist” (we must all make a living) and “political” (you must be a member of UNIP to be one of us). With the coming of multiparty politics things have changed – but for the worse. Access to the markets is still “political” to a great extent, with would-be entrants having to swear allegiance to the MMD in many cases. But there has also been an explosion of “rentier” or “cartel” business, with individuals or groups taking control of whole markets or blocks within markets. These middlemen have in many cases obtained their ownership of market stalls, at very low cost, by dint of influence that may be political or through family networks or simply through corruption. An outsider wanting a stall must then pay, either a purchase price or a rent, to the rentier. Even legal vending patches, of which there are a few, have been “privatized” in this way and the poorer end of the retail trade, typically operating with a capital sum in the region of K2 to K10 million, is unable to meet the costs of becoming legal; hence the illegal street vending.

We students of real economics are very fortunate to have a kind of supernova of the political/rentier phenomenon happening as we think. A former Minister of Local Government and Housing (call her minister One) was given aid money to completely rebuild Soweto market, turning it from “old Soweto” to “new Soweto”. With great effort Minister One persuaded the 2,500 or so tenants at the market to vacate their stalls, but to do so only on the condition that they made sure their names were entered on a master list of priority applicants for the new stalls. She established a committee to carry out this exercise, fully aware there would be some monkey business (taking a few backhanders or succumbing to political pressure), but also ensuring that the bona fide tenants would flush out the illegitimate newcomers if there was any shortage of new stalls to go round.

Along comes Minister Two. He abolishes the committee, negates the list of tenants, and, under pressure from what we can loosely call cadres and rentiers, opens a new list in which most of the original tenants are missing. Clearly the potential for creating illegal street trading is very great. What would you do if you were flushed from your legal stall by the machinations of people with more influence than you?

This is but the tip of the very convoluted street politics. If you don’t fully grasp it don’t worry: I don’t and I am not sure your average Sicilian would. Certainly Minister Three is having trouble getting his head round it all. But we can be sure that the issues are not simple, and that with the passage of not much time the vendors will be back. This is a country in which no new formal jobs are being created, in which only a madman would borrow money at prevailing interest rates, and in which such activities as farming are as uncertain (and politicised) as anything else. What do you expect the people you regard as your “inferiors” to do?

Is the freedom index only for rich and posh people?

Note to vendors: count your lucky stars that you are not in Namibia. They adhere to colonial attitudes there also; but they are GERMAN colonial attitudes. Cripes. I wonder where they come in the economic freedom rankings.

3 comments:

My question is - how easy is it really to set up a business in Zambia, and why would it take years to set up a non-profit or get non-profit tax exempt status in Zambia? Is the process so complicated? Did they forget to bribe someone? What is going on?

After several years in process, and many hours of prayer, the official tax exempt status of Global Samaritans has been secured in Zambia. Although we have been tax exempt in the US for many years, acquiring this status in Zambia has been a very lengthy endeavor. We believe this will help teams when bringing much needed supplies into the country. It will also allow us to buy supplies from other countries (such as building supplies from South Africa) without having to add on an approximate 25% tax to their cost. This is a HUGE answer to prayer!

Global Samaritans is recognized as a tax exempt organization here in the U.S. (IRS 501(c) (3) organization). All contributions to Global Samaritans are tax deductible.

That there are differences between indices such as the Economic Freedom, Economic Freedom of the World and Competitiveness indices is very important because it shows that no matter how you measure economic freedom you always get the same result: freer economies, however measured, tend to outperform less-free economies.

What's also instructive is the bizarre obfuscation of anti-market fundamentalists in denial about the overwhelming evidence for economic freedom.

That Zambia has, by one of the indices, Africa's freest economy, despite horrendous assaults on the liberty of small and informal entrepreneurs, tells us more about how unfree Africa is. That Zambia is has more economic freedom than most of the world's countries, tells us unfree most countries are. That Zambia is becoming less unfree is laudible, not just for the obvious reasons, but because change towards freedom is a more significant determinant of prosperity than the economic system itself, which explains the performance of relatively unfree economies like India and China.

The laws of economics are very generous, they reward unfree countries rapidly and substantially merely for minor shifts towards liberty.

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